Why Schwab Thinks the Housing Market Has Bottomed

NEW YORK ( TheStreet) -- Investors are waiting for one large part of the economy -- real estate -- to show signs of a revival before piling into the stock market.

Liz Ann Sonders, chief investment strategist at Charles Schwab, says we're near a bottom in the housing market, leading her to predict the economy will improve steadily this year rather than to sag in the first half as many economists expect. So now might be the time for investors, who are fleeing mutual funds and the stock market in general, to buy equities.

Sonders' biggest gamble is her view that housing is indeed near its low point after declining for five years. There's been an uptrend in new- and existing-home sales, housing starts and builder confidence. Lennar Corp. ( LEN), the nation's third-largest homebuilder, said the housing market is beginning to stabilize. Lower home prices and interest rates are making it more affordable for consumers to buy homes.

While there remains a glut of inventory in the housing market, Sonders believes we are nearing the point in the chart of housing data that we will look back on and realize it was the low point. The recovery will be driven by local economies, with certain regions leading others.

That said, the recovery in housing will be a slow and gradual one, similar to how Sonders sees the recovery in the overall economy playing out.

While most economists are planning for the European debt crisis, among other things, to curb growth in the U.S. in the first half of 2012, Sonders disagrees. She points out that the U.S. has reduced exposure to the eurozone, from which we derive a small portion of U.S. GDP. Additionally, she believes the European Central Bank isn't getting enough credit for its long-term refinancing operation, or LTRO, by which it's injected liquidity into the market.

Assuming there's no major negative catalyst in Europe, a la the collapse of Lehman Brothers here in the U.S. in 2008, Sonders thinks the U.S. economy will continue to improve and show growth throughout the year, albeit at a moderate pace.

There is a $1.2 trillion spread between bond and equity mutual fund investing, an unprecedented level. Investors flocked to bonds in 2011 as European worries and a U.S. downgrade caused them to take risk off the table and seek safety in bonds. Because of the wide spread, as we enter 2012, Sonders is biased toward investing in stocks rather than bonds.

The argument has been made that as the government pours money into the system, inflation will drive the Federal Reserve to increase interest rates. Most investors know that typically when bond yields increase, stocks will fall.

That's not the case in a deflationary environment. With excess production in the U.S., Sonders makes the argument that we are more likely in a deflationary environment -- with more goods available than we have the money for -- than an inflationary one. Thus, any move by the Fed to eventually tighten monetary policy and raise interest rates likely won't put downward pressure on the stock market.

As more money is shifted toward equity investments, cyclical stocks will be the ones that benefit the most. Sectors like industrials and materials are where you'll want to be invested. Stocks that fit the bill and have been highlighted on the Real Money Pro Web site include automotive supplierAmerican Axle ( AXL), and specialty chemical companySolutia ( SOA). Defensive stocks, like utilities and consumer staples, will be left in the dust despite offering decent dividend yields.

It's Friday and that means it's time for a little fun. Did you know that the price of panties is plunging? True story. Meanwhile, here are some quick things to know about markets this week. To be sure, stocks have enjoyed quite the bounce.